KROGER CO Q4 2026 earnings call

Good morning. Thank you for joining us for Kroger's Q4 and full year 2025 earnings call. I am joined today by Kroger's newly appointed Chief Executive Officer, Greg Foran, Chairman, Ronald Sargent, and Chief Financial Officer, David Kennerley. Before we begin, I want to remind you that today's discussions will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. The Kroger company assumes no obligation to update that information. After our prepared remarks, we look forward to taking your questions.

In order to cover a broad range of topics from as many of you as we can, we ask that you please limit yourself to one question and one follow-up question if necessary. I will now turn the call over to Ron.

Well, thank you, Rob, and good morning, everyone. Thank you for joining our call today. Before we start, I'd like to just take a moment to welcome Greg Foran as Kroger's Chief Executive Officer. Greg's a strong leader with a proven track record of driving growth in large and complex businesses. He has spent most of his career in food retail, and he understands what it takes to run great stores and build a strong e-commerce business. His priorities align closely with the work we've been doing over the past 12 months: putting the customers at the center, moving with urgency, strengthening our e-commerce business, accelerating media, and improving productivity to invest in lower prices. Many of you will know his background.

He started as a store associate at Woolworths in New Zealand and eventually led Walmart US, where he was responsible for thousands of stores as well as over a million associates. During his tenure, the business delivered consistent sales growth while improving store operations and building e-commerce capabilities. Most recently, Greg led Air New Zealand during the pandemic, one of the most challenging periods in the history of the airline industry, helping position the company for a solid recovery and leading their digital transformation. Greg is the right person to lead Kroger. We're excited to have him. He will close our prepared remarks today with his early impressions and focus areas as he steps into the new role. Now turning to the Q4. We're pleased to report another quarter of strong results, capping off a strong year for Kroger.

Importantly, in the final period of the year, we achieved positive market share growth for the first time this year. For the full year, we nearly doubled our identical sales without fuel from 1.5% to 2.9% and grew earnings per share by 9%, which was at the high end of our earnings expectations. This performance speaks for itself. We're executing on our priorities and delivering results. This year we've been intentional about focusing on what matters most to our customers. This work has laid the foundation for long-term growth. Today, I'll talk about the things we got done and the proof points of our progress. In the Q4, we continued to make meaningful progress on our core priorities: improving the customer experience, simplifying our business, and ensuring we have the right talent in place to move with speed.

These actions are strengthening our competitive position today and are building a more efficient, customer-focused company for the future. Serving our customers better starts with delivering value and making the customer experience easier. This quarter, we again made price investments to lower everyday prices and to offer more promotions. This improved our value perception with our customers. We also added store hours during the holidays, particularly in high traffic departments. More associates were available when customers needed them most. These changes improved checkout times and contributed to positive trends in customer satisfaction. As part of simplifying the business, we announced the sale of Vitacost and plan to close nearly 50 underperforming Little Clinic locations. We also continue to review all non-core assets to determine their ongoing contribution and role within the company.

These decisions reflect our commitment to running a more efficient company and focusing on priorities that add the most value. A strong leadership team is also essential to moving faster and executing our strategy. This quarter, we promoted Victor Smith to Senior Vice President of Retail Divisions, along with new division presidents in Atlanta, Fry's, and Ralphs, each with deep operational experience and a track record of running great stores. These leaders were developed within our organization, which speaks to the depth of talent we have across the company. This week, we also elevated Milind Mahadevan for a newly created role to lead artificial intelligence work across the company, reinforcing the priority that we're placing on AI. Milind most recently served as president of 84.51. We see AI as a meaningful opportunity to both improve the customer experience and drive productivity across our business.

We're already seeing results from more competitive pricing, improved shrink to faster fulfillment and tools that help our associates work more efficiently. As we move forward, we plan to expand these capabilities, including agentic shopping on our digital properties. Milind's appointment ensures we have dedicated leadership to accelerate this work. As we look back over the full year, we took several important steps to position Kroger for future growth. We lowered prices on thousands of products, making it easier for customers to see the value we offer. Customer price perception improved across the company, we maintained our competitive positioning against our major competitors. We created a dedicated e-commerce team and completed a comprehensive strategic review of our e-commerce operations that led to an updated hybrid fulfillment model which will better meet customer expectations. These changes will make our e-commerce business profitable in 2026.

We delivered substantial cost savings across the organization through operational efficiencies and modernizing how we work. We reinvested those savings directly into lower prices and improved customer service. We made difficult but necessary decisions to close underperforming stores and reduce corporate headcount to create a more agile and focused organization. We accelerated our new store investments in 2025, completing 29 major projects. In 2026, we expect to increase new store openings by 30% with plans to expand into two new regions, including Jacksonville and Kansas City, two high-potential markets that will support our long-term growth. Collectively, these actions simplify how we operate and sharpen our focus on the core business. They also position us to reinvest in the areas that matter most to our customers, more value and better service.

We've made strong progress, and there's more to do, which Greg will touch on later. This is how we're building a stronger foundation for sustainable growth in the years ahead. Before walking through the quarter, I want to briefly comment on the customer environment. Customers remained focused on value in the Q4, which was consistent with the trends that we've seen throughout the year, and we're continuing to invest in price to make sure we're delivering the value customers expect. Turning to our results. Identical sales without fuel grew 2.4% this quarter, which includes nearly a 40 basis point headwind from the Inflation Reduction Act. Weather had a neutral impact on a year-over-year basis. For the full year, identical sales without fuel grew 2.9% in line with our full year guidance.

We saw continued strength in e-commerce and pharmacy, along with solid performance in key areas of the store like fresh. Importantly, food volumes improved and grocery sales were a larger portion of our sales mix, which is a positive sign going forward. Our market share trends improved in the Q4 and for the full year, and I'm pleased to report in our final period, we delivered positive share gains, our strongest share performance since 2021. We believe the price investments we've made throughout the year are resonating with customers and are contributing to these results, and we made these investments while still improving our full-year gross margin rate, excluding fuel and adjustment items by improving shrink and productivity. We're committed to this balance, investing in lower prices while being disciplined in our margin management.

The work we're doing to find efficiencies across our business allows us to do both. David will speak to these factors in more detail. Our Brands had a solid quarter. Excluding the impact of egg deflation, sales continued to outpace national brands. Simple Truth and Private Selection again led our growth, with customers continuing to choose these products because they deliver high quality at an affordable price. Innovation continues to be a priority. This year, we introduced more than 1,100 new Our Brands products, up from more than 900 last year. A growing number of these products are focused on health, an area where customer demand is growing, and Our Brands portfolio is well-positioned to lead. Our e-commerce business continued to be an important growth driver and one of the key ways we attract new households.

Adjusted e-commerce sales grew 20% this quarter, and we've now built this into a $16 billion business. We also continue to make meaningful improvements in e-com profitability. As this business grows, the profitability improvements we're seeing become increasingly significant to our P&L. E-commerce growth also fuels our media business. More customer shopping online means more impressions, more data, and more value for our advertising brands. That connection between e-commerce and media is key to how we accelerate profitability, and we see significant runway ahead. The early results from our new relationships with DoorDash and Uber Eats have exceeded what we originally planned. They've extended our reach to customers and shopping occasions we wouldn't otherwise capture. They are incremental, and they are profitable.

Together with Instacart, we expect our convenience offerings to deliver over $1.5 billion in sales in 2026, which will help us accelerate our e-commerce growth. Before I turn it over to David, I'd like to take a moment to reflect on the progress we made this year. We took important steps to strengthen Kroger for the long term, lowering prices and improving store execution to better serve our customers, enhancing our e-commerce business to deliver growth while improving profitability, accelerating our store footprint, taking meaningful action on our non-core assets, and strengthening our leadership team with key appointments. To our associates listening in, thank you. I'm proud of what this team has accomplished.

Thank you, Ron, and good morning, everyone. Kroger delivered another strong set of results this Q4 in an environment that remains dynamic. We executed well, delivering solid e-commerce growth, maintaining cost discipline, and achieving our profitability goals. From a financial perspective, this was a year of both strong performance and deliberate investment in the future. We invested in price while improving our FIFO gross margin rate, excluding fuel and adjustment items. We accelerated e-commerce profitability, and we improved our cost structure to redeploy those savings into areas that drive growth. These actions strengthen our financial foundation and support sustainable performance going forward. The momentum in our business gives us confidence in our outlook for next year. Today, I'll start by covering our Q4 results in more detail and highlight some key full year metrics, and then share our guidance for 2026 and the key drivers behind it.

We achieved identical sales without fuel growth of 2.4%, a strong result that includes a nearly 40 basis point headwind from the Inflation Reduction Act. On a two year stack basis, identical sales without fuel grew by 4.8%. Growth was primarily driven by improving trends in units. As Ron mentioned earlier, our share trends improved in 2025, with Q4 trends again improving and culminating in positive share gains in our final period of the year. Sales growth was led by e-commerce and pharmacy, along with strong performance from Fresh. As Ron mentioned, what's encouraging is the underlying composition of that growth. We saw continued improvement in food volumes, with grocery sales representing a larger portion of our overall sales mix. Pharmacy had another strong quarter, led by growth in both core scripts and GLP-1s.

That said, pharmacy contributed nearly 50 basis points less than in the Q3, reflecting the impact of the Inflation Reduction Act and an accelerating shift from brand to generic beginning in January. Food inflation moderated further in the quarter, down approximately 90 basis points compared to Q3, with egg deflation a significant headwind, partially offset by beef inflation. Our FIFO gross margin rate, excluding rent, depreciation, and amortization, and fuel, was flat in the Q4 compared to the same period last year. This result was primarily attributable to sourcing improvements, lower supply chain costs, and lower shrink, offset by price investments and the mix effect from growth in pharmacy sales, which has lower margins. When we provided our second half outlook, we updated our FIFO gross margin rate expectations, excluding fuel and KSP, to be relatively flat for the full year.

We delivered better than that. As our rate improved in the second half of the year, primarily driven by our performance in the Q4, with favorable mix and better shrink results. For the full year, excluding the effect of KSP, fuel, and adjustment items, we improved our rate by 14 basis points while investing more in price, reflecting the balance we have focused on achieving between delivering value and maintaining margin discipline. The operating, general, and administrative rate, excluding fuel and adjustment items, increased 21 basis points in the Q4 compared to the same period last year. The increase in rate was primarily attributable to cycling real estate gains from a year ago and labor investments to improve customer experience, partially offset by lower incentive plan costs and improved productivity.

We continue to make progress on improving our cost structure, and importantly, we're generating more durable cost savings, which we are reinvesting into stores and the customer experience to deliver better service and more value to customers. With that said, we believe we are still in the early stages of what we can achieve. Sourcing and procurement remains a significant opportunity. Together with modernizing our ways of working, we see substantial runway for cost savings ahead. Our LIFO charge for the quarter was $11 million, compared to a LIFO charge of $30 million last year. On a full year basis, our LIFO charge was $157 million in 2025, compared to $95 million last year, resulting in a $0.07 headwind to EPS. We expect our LIFO charge in 2026 to be similar to 2025.

Our adjusted FIFO operating profit in the quarter was $1.2 billion. Q4 adjusted EPS was $1.28, reflecting 12% growth compared to last year. For the full year, adjusted EPS was $4.85 and grew by 9%, coming in at the top end of our long-term growth expectations. Fuel results were better than expected this quarter, driven by strong fuel margin performance, even as gallon volumes declined. Q4 fuel profitability came in ahead of last year. Fuel continues to be an important part of our strategy, building loyalty through our fuel rewards program and providing another source of value for our customers. I'd now like to turn to capital allocation and financial strategy.

We delivered strong adjusted free cash flow of $3.9 billion this quarter, exceeding our expectations.This was driven by the strength of our operating performance, good progress on a range of working capital initiatives, and favorable year-end timing. Our balance sheet remains healthy with our net debt to adjusted EBITDA ratio still below our long-term target range. This gives us the financial flexibility to pursue growth investments and other opportunities to enhance shareholder value. Over time, we expect to move back towards our target leverage ratio. During the year, we completed our $7.5 billion share repurchase authorization. This included a $5 billion accelerated share repurchase program, followed by open market repurchases, which completed our remaining authorization in Q4.

In December, our board approved an additional $2 billion share repurchase authorization. We expect to complete these repurchases by the end of fiscal 2026. Our capital allocation framework remains consistent. We are focused on investing in opportunities where we can generate the highest long-term returns and improving ROIC remains a core priority. We are encouraged by the progress we're making on our major store projects and our recent remodels are delivering higher than expected returns. These investments will be important to driving ROIC improvement over time. I'd now like to share our guidance for 2026 and walk through the key factors shaping our outlook. We expect identical sales without fuel growth in a range of 1%-2%.

It is important to note that the Inflation Reduction Act will create an approximately 130 basis point headwind to identical sales without fuel this year, reflecting the impact of lower reimbursement rates on key medications while having no impact on gross profit dollars. Excluding the IRA impact, we would expect identical sales without fuel growth in a range of 2.3%-3.3%. In terms of quarterly cadence, we expect Q1 identical sales without fuel to come in near the low end of our full year range, driven primarily by continued egg deflation. As this headwind eases, we expect sales trends to improve. A few other dynamics to keep in mind as we think about the year. We expect overall inflation to be lower than it was in 2025.

Within pharmacy, we expect sales growth to moderate to low to mid single digits, reflecting the impact of the Inflation Reduction Act on reimbursement rates and the ongoing shift in brand to generic mix, which is currently greater than we've seen in the past, partially offset by continued GLP-1 adoption and script growth. We'll also continue to regain ESI households, though progress remains gradual, and we do not expect to fully recover the business we previously lost. We expect e-commerce to accelerate from 2025 growth rates with continued strength in delivery and increased store-based fulfillment through our third-party delivery providers. We're also enhancing our loyalty program in 2026. This includes updates to our rewards program and a revamped Kroger credit card, both designed to deepen customer engagement and drive increased shopping frequency across our in-store and e-commerce channels.

Total sales without fuel should be slightly lower than identical sales without fuel, reflecting an approximately $350 million headwind from the closure of our Florida fulfillment center and $300 million headwind from the sale of Vitacost, partially offset by new store openings. We expect adjusted FIFO operating profit in a range of $5 billion-$5.2 billion. We will continue to drive greater value for our customers by investing in price, both in everyday value and through promotions, and we expect these investments to increase compared to 2025. We are also investing in the customer experience, particularly in service and labor hours, ensuring our stores are well-staffed. Even with these increased investments, we expect our FIFO gross margin rate, excluding fuel and adjustment items, to improve in 2026. These investments will be funded through increased productivity and cost savings.

We expect to exceed our 2025 cost savings with increased contributions from two areas in particular: e-commerce and procurement. In e-commerce, we will lower our cost to serve by fulfilling more orders out of stores closer to our customers and by leveraging our third-party delivery providers. In procurement, we are going after both cost of goods sold and goods not for resale with a level of intensity that reflects the scale of the opportunity. In fresh imports, national brands, and Our Brands, we are renegotiating supplier agreements, going direct where we have historically used intermediaries, and ensuring that every dollar of Kroger's purchasing power is working for us and our customers. The savings we generate flow directly into lower prices for our customers. We have dedicated teams focused on these areas, we are confident in our ability to deliver.

Thank you, David. Good morning, everyone. I'm excited to be here and grateful for the opportunity to lead this great company. It's been about a month since I started. I've spent that time learning Kroger from the inside out. I've been spending time with Ron and the leadership team, having one-on-one conversations with leaders across the organization and getting out to visit stores, distribution centers, and manufacturing facilities, and importantly, also watching how our customers shop. I've begun working with the team to review our strategic plan. I'll share more as that work progresses. What I've seen so far has reinforced my belief that Kroger has tremendous strengths to build on. We have a loyal customer base, dedicated associates, a strong store network, and real momentum in areas like fresh, e-commerce, and Our Brands.

I've also been impressed by the energy I've seen in the stores, associates taking ownership of their work and taking pride in serving customers. The team has done excellent work, particularly over the past year, to strengthen the business, and my focus is on how we operationalize our strategy to make us even better. It starts with the top line. We need to grow sales faster, and in my experience, that comes down to giving customers a compelling reason to shop with you by offering great value, great products, and a great experience. Price is an important part of that equation. Customers need to trust that they're getting a fair deal every time they walk into our stores.

We've made progress on price, and I want to keep pushing by pulling unproductive costs out of the business, investing in everyday value, sharpening our promotions, and making sure customers see and feel the difference when they shop with us. When you combine competitive prices with strong, fresh, and a well-run store, you drive traffic, you grow baskets, and you gain share. That's what I want to accelerate at Kroger. I've spent my career in food retail, and running great stores is how you make that happen. It's about delivering a great experience consistently in every store on every visit, whether shopping in store or online. Fresh is a good example. Customers develop a lasting impression based on the quality of fresh foods, which is incredibly important as we accelerate e-commerce. Get those right, and we earn their confidence.

My focus will be on continuing to improve execution and ensuring our associates have the tools and support they need to serve customers well. To invest more aggressively in the customer experience, we have to be disciplined and aggressive on costs. I see significant opportunity here, and we're going after every available margin dollar across the business. Some of that is buying better and proving how we source and procure products, and some of it is improving productivity by streamlining processes and modernizing our ways of working. The savings we generate will be reinvested directly into lower prices and better service for our customers. That's how we will fund our growth. Customers want convenience and are increasingly shopping online to buy food. We have the assets to meet that demand, and e-commerce is a key focus area for us.

We've built this into a more than $16 billion business with seven consecutive quarters of double-digit growth. There's a strong foundation. We need to accelerate it. Our stores are central to how we serve customers online. Our refreshed hybrid fulfillment model, which better leverages of stores and delivery providers like Instacart, DoorDash, and Uber Eats, positions us to accelerate growth while reaching profitability next year. By using our stores as fulfillment hubs, we get inventory closer to customers, reduce last mile costs, and offer the speed and convenience that customers are looking for. Our media business is closely tied to this e-commerce momentum. We have the data, we have the customer relationships, and we have the platform. E-commerce grows and our digital capabilities expand, we see a long runway to accelerate growth. My goal is to do all of this while protecting our margins.

The investments we're making in price and the customer experience are funded by the cost savings and efficiencies I described and by growth in media. That discipline is essential. We will grow the top line and gain share, invest in the customer, and deliver long-term value for shareholders. I've been in food retail a long time, and I know what good looks like. It starts with the customer. It's built on strong execution in our stores and online, and it requires a team that wants to win and is willing to move fast. That's what gives me confidence. Kroger has all the ingredients to win, and my job is to bring it all together. We'll now open it up for questions.